CPG Playbook   //   May 13, 2024

Interest in energy drinks continues to explode even as brands experiment with new ingredients and caffeine content

Investor interest in cleaner, healthier energy drinks shows no signs of fizzling out.

After a number of lucrative exits, investors have proven eager to back new challengers in the energy drink category. The rise of Celsius, whose stock price has more than doubled over the past year, is a success story that many of these new brands are hoping to emulate. Other historically large players in the category, like Rockstar, have seen sales decline in recent years. That leaves startups with what they believe is plenty of white space.

There’s been a wave of new entrants over the past few years, like Gorgie, Odyssey Elixir and Joggy, that aimed to stand out with more colorful branding and natural ingredients like green tea-based or mushroom caffeine. But still, there’s no sign that the enthusiasm around energy drinks is dampening. Even big brands like Starbucks are hoping the category will give a jolt to their sales, with the coffee chain announcing in its latest earnings that it will soon introduce a zero-to-low-calorie beverage. In turn, startups are trying to prove their staying power through healthier ingredients, varying degrees of caffeine content and modern branding that appeals to a wider audience.

Key is one of the newest natural energy drinks to burst onto the scene. Key launched in April and is made of fermented ketone, a supplement that provides an energy source for the body. Co-founders Tekla Back and Karishma Thawani, who come from Pepsi and Coca-Cola respectively, say the low sugar and natural ingredients are a big draw for both investors and buyers.

Key is launching in several channels, including Erewhon and on Amazon, with a $4 million seed round to help kick off distribution and marketing. The round was led by AgFunder, with additional backing from CPG fund Alethia and SIJ Impact Fund. “We want ketone to be the new protein,” Thawani said.

“When it came to fundraising, it was important to find the right investors that understand the science behind the product and why it differentiates it,” Thawani said. She said that from research and the founders’ beverage background, a lot of people want natural energy drinks that also provide a long-lasting boost. In turn, Key is positioning itself as the drink catering to this demand. 

Energized investors

Anna Whiteman, partner at Coefficient Capital, told Modern Retail that investors are also increasingly trying to create more thematic portfolios that reflect specific CPG categories, whether it be food and beverage, beauty or wellness. With that also comes a focus on subcategories like energy beverages, in which Whiteman said there is still room for new players to grow. Coefficient Capital, for example, has backed Gorgie.

Moreover, she said there is still an opportunity to “clean up the category” by tweaking formulations to cater to different types of people. “If you look at most energy drinks on the market today they’re typically messaging toward men or workout-driven, like how Celsius started out,” Whiteman said. 

Other investors are also finding potential in new energy drink brands, enough to back them even at a time when big rounds are hard to come by.

Taylor Foxman, CEO of The industry collective and partner at Alethia, said that the CPG space has been challenged since 2020 due to issues like supply chain challenges, high interest rates and lack of funding. In turn, there’s been a decline in CPG innovation in some regards, due to cash-strapped brands being forced to cut back on new product development or hiring talent. That being said, “consumer demand for innovation is not going away, as seen by the growth in things like functional beverages,” said Foxman, whose fund has backed brands like Heywell and Key in the energy drink space.

Funds like Alethia are trying to zero in on brands experimenting with functional ingredients, but aren’t overly reliant on passing micro-trends. “One of the big reasons we’ve invested in companies such as Heywell and Key are because they’re both positioned for the long term,” said Foxman. Both brands, she said, offer multiple benefits, like rehydration and improved focus. In Key’s case, fermented ketones are also known for health benefits like improved metabolism and mental focus. Aside from formulation, Foxman said the founders themselves were a big draw. “The founders are also beverage industry pros, who know what it takes to survive in a competitive CPG, and particularly beverage,” she said.

As Foxman sees it, a lot of functional and natural energy beverage brands are overly focused on single ingredients or isolated occasions. This prevents a pivot if demand for trends changes which can prevent scale.

“Heywell’s proposition is a crossover of hydration, but also growing ones like mood and immunity support,” Foxman said. After launching with angel investments in 2022, Heywell raised a round for an undisclosed sum in February. The company is now trying to expand its flavor profiles, launching a lemon fizz SKU this summer.

The trick, then, for many energy brands that are new to market is to find a balance between differentiating with ingredients but not being too overly reliant on a single trend. One way to do that is through new lines and product expansion.

Odyssey Elixir, an energy drink startup that launched in 2022, recently released a new line this year with more caffeine. In February, Odyssey closed a $6 million equity investment, bringing its total funding to $14 million to date. The brand is now in over 6,000 stores, most recently entering 7-Eleven this spring and has grown 50% year-over-year. 

Odyssey founder Scott Frohman said investors’ interest to the product is largely due to its ingredients differentiating it from conventional energy drinks. Its marquee product is a sparkling energy drink that contains 85 mg of caffeine and is infused with lion’s mane and adaptogenic mushrooms, which the company says help offset the caffeine jitters associated with most taurine-based energy brands. Findings from a 2023 National Institutes of Health study “tentatively suggest” that lion’s mane may improve speed of cognitive performance in young people.

However, Frohman also said that the company quickly found that a one-size-fits-all formula doesn’t fit every type of retailer Odyssey has entered, which range from natural grocery like Erewhon to convenience chains. 

For starters, Forhman said it was “hard to win with just the 85 mg of caffeine.” So Odyssey’s newest line, the Odyssey 222, contains 222 mg of caffeine (By contrast, Celsius’ original line contains 200 mg of caffeine). The brand also has Odyssey Revive, which uses electrolytes, magnesium, zinc and vitamin C instead of caffeine. “We did a survey that showed a lot of people love the product, but they’re buying it with a Bang or Celsius,” Frohman said. “We’re able to go up to 222 because the other functional ingredients help round out the caffeine.” This new direction, plus the rapid retail expansion prompted the company to raise more capital. 

As such, the energy drink boom shows no lines of slowing down, as new players race to see who can develop the most innovative sub-lines the fastest. Foxman chalks it up to brands seeing a demand for more, functional energy drinks, and are filling the gap on shelves. “Consumers’ tastes evolve and segments conflate, so hybrid solutions are entering the market,” she said.